Vinci Compass Investments Ltd. (VINP) Earnings Call Transcript & Summary

Good morning, and welcome to the Vinci Partners Investor Call. [Operator Instructions] As a reminder, this will be recorded. I would now like to turn the conference over to Anna Castro, Investor Relations Manager. Please go ahead, Anna.

Thank you, and good morning, everyone. Thank you for joining us on short notice today to hear more on our transaction with SPS Capital. Joining today are Alessandro Horta, Chief Executive Officer; Bruno Zaremba, Private Equity Chairman and Head of Investor Relations; and Sergio Passos, Chief Financial Officer. We have issued a press release and presentation, which are available on our website at ir.vintepartens.com or on Form 6-K filed with the Securities and Exchange Commission. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and outside of the funds control and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 20-F. Also note that nothing on this call constitutes an offer to sale or solicitation of an offer to purchase an interest in any venture partners or SPS funds. With that, I'll turn the call over to Alessandro.

Thank you, Anna. Good morning, everyone, and thank you all for joining our call. We are thrilled to announce that we have reached an agreement to acquire SPS Capital, one of the top independent special situations asset managers in Brazil, with BRL 2 billion in assets under management. With this transaction, we are bringing a highly experienced, top-performing and best-in-class team led by Marcelo Mifano, Partner and Co-Founder of SPS, who will join as a partner of Vinci, alongside Tomás Jatobá and Benjamin Citron, the other 2 main partners of SPS. The SPS team has extensive experience in the special situations investment space in Brazil. Mifano was head of BTG Factual Corporate Special Situations Strategy before founding SPS, alongside Tomás Jatobá, SPS co-Founder and former Head of Legal for Onshore Credit Operations also at BTG Factual. Mifano and Jatobá were subsequently joined by Benjamin Citron, a professional with vast experience in the special situations strategy, has been working more recently in Bank of America and Votorantim. We are confident that the SPS team will be a great culture and business fit with Vinci, as we share the same values and principles based on reputation, first-class human capital, alignment of interest with LPs and a portfolio built on downside protection with the ultimate goal to create value for all parties involved. I believe our partnership with SPS is beneficial to Vinci in all fronts, starting with our consolidation in the private market space in Brazil. SPS will fill a strategic and extremely important gap in our platform that we can build on and grow into synergistic and complementary funds like we historically did in private equity, real estate, infrastructure and private credit. In addition, as mentioned, the SPS team brings a complementary investment experience to our platform, which we can leverage in cross-vertical collaboration within our private market practices. To that extent, the SPS team is highly aligned with each in terms of growth for additional vintages in their flagship strategy and new products since a relevant part of the transaction will be structured through an earn-out paid in Vinci Partners' Class A common stock, subject to additional fundraising by the SPS team. Bruno will cover more on the transaction details in a few moments. We have been working consistently since Vinci's foundation to build a truly one-stop shop for alternative investments, and the acquisition of SPS represents a significant milestone in our story for which we believe really sets us apart. The continued strengthening of our platform positions Vinci well for the ongoing trend of LPs looking to consolidate their relationships around fewer GPs. SPS offers a set of differentiated and attractive risk return investment opportunities in a market where there is a limited number of managers with track record and expertise. The team will continue to manage all 3 vintages in its current portfolio, maintaining its core investment process, oversight and execution of the special situations strategy within Vinci. Our partnership with SPS will only add to their capabilities of raising additional products, combining their outstanding track record and management skills with our proprietary distribution. Another important factor in this partnership is that it presents the first M&A transaction since our IPO last year. As we have been discussing in previous earnings conference calls, our team has been consistently analyzing the opportunities in the M&A space, and we wanted to be extremely careful in considering of our business model and our long goals when looking at this opportunity. What really captivated us when we started our conversation with SPS was, first of all, the team, a top-performing management team with extensive experience in the market, combined with the structure we achieved for this transaction, already accretive and distributable earnings per share in the low to middle single digits in the short term and a potential for high single-digit accretion in the medium term. We are excited for what we can build alongside the SPS team. The announcement today is only the beginning of what we believe will be a very successful and fruitful partnership for Vinci and our shareholders. We have been working persistently to deliver the best results and are totally focused on the long-term prospects for our company, raising new funds and delivering outstanding results to clients in our shareholder base. I'd like to thank you for joining us again. With that, I'll turn the call over to Bruno to cover the transaction in more detail.

Thank you, Alessandro, and good morning, everyone. Following up on Alessandro's remarks and moving on to Slide 5, I would like to give a little bit more color on the special situations market and where SPS is currently situated in the asset management space. Our team at Vinci has always been interested in the special situations market, and our partnership with SPS is a perfect first step into our expansion in this segment of the industry. The gap that will be filled by SPS means Vinci's origination platform will be able to take advantage of investment opportunities that were previously discarded given that we didn't have a suitable capital pool to allocate them. We have, until today, refrained from adding this vertical to our business given our inability to find a team that matched our culture, with the performance standards that we are used to here at Vinci. That has changed given the fit we found with the SPS team. We are talking about a sizable and really unexplored market in Brazil, with the vast pool of asymmetric investment opportunities. First, the strategy presents considerable flexibility on capital allocation, which allows it to have adequate risk returns across all stages of the macroeconomic cycle. The Brazilian market is still pretty much unexplored with a very limited number of players with the experience and track record in this asset class. This traditional credit markets are not open to our targets due to the complex nature of transactions, which creates a complexity versus eligibility opportunity. Usually, guarantee structures backing SPS transactions are more complex in nature, which tends to drive away capital supply from traditional more plain vanilla providers. In addition to a very attractive market setup, SPS has been able to carve out important key competitive advantages that strengthen their market position and enhance investment outcomes. These competitive advantages will be important drivers to capture the full growth potential of the strategy. The team has successfully raised all 3 vintages in their flagship strategy with the proprietary distribution channel, composed mainly of Brazilian high net worth individuals with whom the SPS team has close relationship. At this stage, SPS has no distribution agreements with third party or placement agents, no international capital and no local institutional capital. We believe, given the combination of a strong track record with great capital deployment opportunities, there will be demand to allocate capital into the strategy over time from other capital providers. And this is an area where we believe there will be substantial synergies going forward. The aforementioned strategic relationship with its current LP base has resulted in a differentiated origination network for SPS, really setting SPS apart from other special sits managers in terms of portfolio composition, which reflects directly in the fund's returns. SPS flagship strategy has been delivering outstanding returns with all 3 vintages performing way ahead of their benchmarks, with total track record posting above 20% net IRRs. On top of that, SPS has an investment team with best-in-class reputation in the market, which for us is a key element for this transaction, where we rely on people that manage the business to really take it to the next level and create value within the platform. SPS partner and Co-Founder, Marcelo Mifano, will join Vinci's Executive Committee [indiscernible] to the main partners of Vinci, and we believe he will become a valuable contributor to our vision as a company as we share the same values and long-term goals. In Slide 6, we bring some highlights of the special situations market in Brazil to highlight the size of the potential capital deployment opportunities in this new investment vertical. Write-offs have represented over BRL 500 billion over the last few years, a huge market for restructuring opportunities. There were over 75 million legal claims in Brazil, which is another area of focus of the SPS team. Total credit in the top 20 legal restructurings represented BRL 290 billion, with approximately 7,000 requests for Chapter 11 over the last 5 years. This huge and unexplored market creates space to structure superior risk return investment opportunities, which SPS has been able to capitalize on through its all-weather approach. The team invests through 5 different strategies with low correlation between them with exposure to assets in different sectors and the opportunity to deploy capital across different market cycles. Transactions are structured in a way that combine equity-like returns with debt-like downside protection. The main goal being capital preservation in a downside case scenario. Turning to Slide 7. SPS has experienced a success on high-growth trajectory since its foundation in 2017, fundraising 3 subsequent vintages in its flagship strategy in only 5 years. Their third vintage closed in November 2021, reaching BRL 1.1 billion in capital commitments, almost double the size of vintage 2. The acquisition of SPS Capital will reach Vinci's FRE and the distributable earnings composition. We are acquiring a business model with recurring and highly visible revenue streams coming from funds with long-term lockups in a private market structure fee, higher than Vinci's current average rates. As already mentioned, SPS has a high quality and proprietary investor base for which we believe we have the potential for upside for cross-selling our existing complementary funds to these investors. Finally, we expect to leverage SPS growth by building on, number one, a diversified knowledge and exposure to different private market business strategies; number two, our entire distribution network to distribute SPS new vintages and new products; and finally, number three, potential JVs with other business segments within Vinci, which are highly synergistic and complementary to the sectors SPS has been investing and targeting their investments. Moving on to Slide 11, we present our AUM pro forma with the inclusion of SPS based on the end of the second quarter of 2022. We are disclosing an update on our AUM ahead of our earnings call on August 11 to bring better understanding of the transaction impact in our latest AUM. Considering the proximity of today's announcement to our second quarter earnings conference call, we will not be taking questions on inflows and AUM behavior in the quarter, as they will be discussed in detail in our next conference call with all the disclosure necessary. Vinci ended the second quarter with BRL 60 billion in AUM against BRL 57 billion as of the end of the first quarter of 2022. Therefore, our second quarter pro forma AUM, including the acquisition of SPS, results in a total of BRL 62 billion. Looking more granularly into long-term AUM, the additional AUM from SPS will drive an 8% growth in long-term capital balance at Vinci. We expect a low to mid-single-digit short-term accretion to distributable earnings per share with the transaction with an upside to a high single-digit medium-term accretion. This medium-term accretion target is based only on additional FRE from fundraising capital allocation of existing funds and does not include potential impact from future PRE coming from this vertical. Given the nature and structure of the funds, there is substantial long-term PRE upside coming from this new segment. To finalize our remarks, we would like to go what we believe is one of the key attributes of this transaction, which is the consolidation of Vinci's position in the alternative asset management space, with a new private market strategy in our diverse portfolio of business lines. As we can see in Slide 12, one of the main strategic priorities since Vinci's foundation has been to expand into new and complementary products in private markets, an asset class that has few, a very limited number of players with experience and who are able to raise in deploy capital in Brazil. We have grown our private market platform from our first vintage in our flagship private equity fund, VCP, in 2004 and have since experienced a series of milestones, such as the launch of our first credit fund, VCI I in 2014, followed by our first perpetual capital vehicle in real estate in 2017, which through the years grew into a BRL 5 billion strategy with several funds listed in the stock market, bringing additional perpetual capital to the platform. We started raising our impact private equity fund and second vintage in Infra, FIP Infra, in 2017, followed by our first ESG funding credit in 2018, VES. In 2021, we launched 2 new strategies across real estate infrastructure, VFDL and VIAS. Today, we announced a new milestone with the acquisition of SPS Capital in the launch of our special situations division, Vinci SPS. We believe there is enormous potential for SPS to launch new and adjacent products on top of its flagship strategy and really expand their business through the next years and, over time, grow into a multibillion segment for Vinci. We couldn't be more excited about the outlook for this vertical. Finally, Slide 13, we have the full spectrum of strategies across private markets in Vinci currently and how SPS has filled a strategic gap in our product offering. Moving on to an overview of the transaction on Slide 14. Vinci will acquire SPS through initial cash components paid at closing. An additional consideration is to be paid in Vinci Class A common stock, with a maximum number of shares issued of 1.7 million shares through an earn-out structure measured in late 2026. This earn-out is subject to the achievement of additional fundraise and incremental management fee revenue targets, which ultimately aligns interest between the SPS and Vinci teams. In terms of performance fees, the SPS team is entitled to receive 100% of the all performance fees from vintages 1 and II, which were fully invested prior to the transaction, and 70% of performance fees coming from vintage 3. Additional vintages and funds will be subject to Vinci's standard performance compensation structure for private market strategies. We are thrilled to welcome the SPS team to Vinci, and to start working together towards building what we believe will be the reference special situations franchise in Brazil. Vinci is increasing the platform's reach, expanding product offering through a new strategy that we do not operate, while adding a best-in-class investment team. On top of that, we see substantial upside for fundraising future vintages, and we have a sizable upside coming from performance fees from SPS vintage 3 and future funds. Vinci is adding BRL 2 billion in long-term AUM to the platform with higher than our average fees, increasing the quality, stability and visibility of future results. To finalize, this is our first strategic M&A transaction since the IPO through a combination of cash from our IPO and our liquid currency in the form of traded stock to leverage inorganic growth. We are very happy with this step, and we'll continue to work towards finding the best strategic opportunities for Vinci. Once more, we would like to thank you for joining us today. We're now happy to take your questions. Thank you.

[Operator Instructions] Our first question will come from line of Ricardo Buchpiguel from BTG Pactual.

Congrats on the deal. I have a few questions. So first, I wanted to get an idea on what you expect in terms of AUM growth for SPS after it brings in the Vinci platform perhaps compared to other strategies, just to get an idea? I also wanted to get more color on the economics from an SPS front. So if you could perhaps share in what is the revenue perhaps FRE margin and the mix between FRE and PRE, it will be helpful. And for my final question, could you also please talk a little bit about, right now, how is the competitive and fundraising environment for the special situations industry?

Alessandro Horta here speaking. Thank you very much for joining us today, and I'll try to answer the first part of your question, then I'll leave Bruno to talk about the more the economics and margins of the SPS business. So as we highlight in this call today, SPS, they just had 3 vintages where we have the flagship strategy that's provided between different strategies inside the special situations strategy. And the last vintage that they raised at the end of last year is BRL 1 billion plus fund BRL 1.1 billion, if I'm not mistaken, the exact number. And we, as we highlighted, I would say, the majority of this capital just came from high net worth and family offices in Brazil's most traditional investors. So they do not have today [indiscernible] or the more traditional institutional investors like the local pension funds with a sizeable amount of their AUM. So we expect that together, we can expand a lot, even maintaining the same flagship strategy for the next vintage, a larger pool of capital, because the opportunity universe is very big. So just keeping the ongoing strategy with the flagship fund, we believe that we can grow to a larger AUM to the next vintage of the flagship step. Together with that, we've not saying right now, but we believe there is a lot of adjacent strategies to be done, especially because, as you know, the credit market in Brazil is very untapped from point of view of the asset management industry. And we believe that the SPS team and the SPS track record brings a lot of knowledge and synergies to Vinci that we can explore in the future. So we believe that we can grow a lot. And complementing with the rest of the special sits universe, the other asset managers that tapped is, what we noticed in our research is that even when they have investing strategies that are no way similar, even if the market is very big. The pool of capital that they tap from is very different. So there is some [indiscernible] tap from foreigners, other from more high net worth, or they distribute their products through platform of placement agent. So we do not have a [ formal ] type of AUM, I would say, distribution between this. So this shows that's really in a nascent market that there's a lot of opportunity to explore. With that, I will lead to Bruno to go in more detail about the numbers and the multiples of the business.

Okay. Thank you, Alessandro. Thanks for the question, Ricardo. So talking about the business, the profile of the business is very good. It's aligned with our best margin products, right? So when you look at the revenue streams and the profile of the economics of the special situations products that are brought into the platform with SPS, they are towards the higher end of what we have in our business today. So we are talking about full fees, long-term lockups, a product that has a very high potential from a PRE standpoint. So at the current level of size of product, we already have several hundred million potential revenue from PRE as a potential for each vintage. And on a relative basis, just to give you some guidance, so the fees, the fees of the product, as I said, they are in the higher end. So if you look at our private market division, they are higher than the average of our private markets division today, which is around 1%. If you look at the margins, the margins that are being brought into Vinci are higher than the average margin of Vinci and are towards the higher end of our private market segments. So they are going to be accretive from a margin standpoint as well. PRE, despite the fact that there's a lot of upside, it's more into the future as we have explained Funds 1 and 2, the PRE will be 100% reverted back to the SPS team given that the funds already in the distribution modes. So they're already fully allocated and already distributing back capital to our piece. We're going to have a smaller take in fund 3. But if you look into the product from a structural standpoint, the PRE side is similar to what we see in the more like carry-style, absolute return-style private markets fund that we have, like VCP, VIR, the VSDL, that's the kind of upside from PRE that we see in this product. There are adjacent products, as Alessandro mentioned. I think there are several things that we can do alongside the SPS team that are not specifically the flagship, but we see a substantial amount of growth just from the flagship. We see this product as being a multiple billion vintage products. It's an acyclical, almost acyclical product. It can perform independent on the macroeconomic environment. The setup of the transactions are very interesting. They are backed, in a lot of cases, backed by real assets and a lot of recovering the case that the performance of the underlying asset does not go as expected. So there's a lot of downside protection embedded in the structure. So we feel very favorable about the outlook of raising bigger funds going forward in the flagship strategy, as well new vintages in the flagship strategy. The last point that I would make here is that the high single-digit medium-term guidance that we did on the DE standpoint, it does not include PRE impact, and it does not include goodwill impact. There's going to be a lot of goodwill generated by this deal that's going to sit in the balance sheet of Vinci and that we expect to optimize our tax structure over time. It's not going to be done in the immediate future, but it's something that can add value for us in coming years. So it's also an important point. Finally, just to wrap up the question, when we talk about the accretion, just remember that there's an offset between FRE and financial income. So the DE encompasses both those impacts. We are going to have a cash outplay at closing. So the financial income line is going to probably reduce a little bit given that cash outlay, but it's going to be more than compensated by FRE, and that's the net of the 2 is the fact that we're guiding for the [indiscernible]. So I think that's another important component when you work on your models. And thanks again for the question.

I'm not showing any further questions in the queue. I'll turn the call over back to Alessandro for any closing remarks.

So good morning again, and thank you very much. We are very, very optimistic with the prospects of Vinci SPS, in the complementary knowledge and experience, especially regarding the credit universe will be very helpful to address the huge opportunity that we see ahead. So thank you again for your joining us today and your continued support.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.